Accounting principles 12th wiley kieso chapter 09

9

Accounting for Receivables

Learning Objectives
1

Explain how companies recognize accounts receivable.

2

Describe how companies value accounts receivable and record their disposition.

3

Explain how companies recognize notes receivable.

4

9-1

Describe how companies value notes receivable, record their disposition, and present and
analyze receivables.


LEARNING
OBJECTIVE

1

Explain how companies recognize accounts receivable.

Amounts due from individuals and other companies that are expected to be collected in cash.

Amounts owed by customers on

Written promise for amounts to be

Nontrade receivables such as

account that result from the sale

received. Normally requires the

interest, loans to officers, advances

of goods and services.

collection of interest.

to employees, and income taxes.

Accounts
AccountsReceivable
Receivable

9-2

Notes
NotesReceivable
Receivable

Other
OtherReceivables
Receivables

LO 1


Types of Receivables

Amounts due from individuals and other companies
that are expected to be collected in cash.

Illustration 9-1
Receivables as a percentage
of assets

9-3

LO 1


Types of Receivables

Three accounting issues:

1.

Recognizing accounts receivable.

2.

Valuing accounts receivable.

3.

Disposing of accounts receivable.

Recognizing Accounts Receivable

9-4



Service organization records a receivable when it performs service on account.



Merchandiser records accounts receivable at the point of sale of merchandise on account.

LO 1


Recognizing Accounts Receivables

Illustration: Assume that Jordache Co. on July 1, 2017, sells merchandise on account to Polo Company for
$1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of Jordache Co.

Jul. 1

Accounts Receivable

1,000

Sales Revenue
1,000

9-5

LO 1


Recognizing Accounts Receivables

Illustration: On July 5, Polo returns merchandise worth $100 to Jordache Co.

Jul. 5

Sales Returns and Allowances

100

Accounts Receivable
100

Illustration: On July 11, Jordache receives payment from
Polo Company for the balance due.

Jul. 11

Cash

882

Sales Discounts ($900 x .02)

18

Accounts Receivable
900
9-6

LO 1


ANATOMY OF A FRAUD

Tasanee was the accounts receivable clerk for a large non-profit foundation that provided performance and exhibition space for the performing and visual arts. Her
responsibilities included activities normally assigned to an accounts receivable clerk, such as recording revenues from various sources that included donations, facility
rental fees, ticket revenue, and bar receipts. However, she was also responsible for handling all cash and checks from the time they were received until the time she
deposited them, as well as preparing the bank reconciliation. Tasanee took advantage of her situation by falsifying bank deposits and bank reconciliations so that she
could steal cash from the bar receipts. Since nobody else logged the donations or matched the donation receipts to pledges prior to Tasanee receiving them, she was
able to offset the cash that was stolen against donations that she received but didn’t record. Her crime was made easier by the fact that her boss, the company’s
controller, only did a very superficial review of the bank reconciliation and thus didn’t notice that some numbers had been cut out from other documents and taped onto
the bank reconciliation.

Total take: $1.5 million

THE MISSING CONTROL
Segregation of duties. The foundation should not have allowed an accounts receivable clerk, whose job was to record receivables, to also handle cash, record

cash, make deposits, and especially prepare the bank reconciliation.
Independent internal verification. The controller was supposed to perform a thorough review of the bank reconciliation. Because he did not, he was terminated
from his position.

9-7

LO 1


DO IT!

1

Recognizing Accounts Receivable

On May 1, Wilton sold merchandise on account to Bates for $50,000 terms 3/15, net 45. On May 4, Bates returns
merchandise with a sales price of $2,000. On May 16, Wilton receives payment from Bates for the balance due.
Prepare journal entries to record the May transactions on Wilton’s books.

May 1

4

Accounts Receivable—Bates

50,000

Sales Revenue

50,000

Sales Returns and Allowances

2,000

Accounts Receivable—Bates
16

9-8

Cash ($48,000 - $1,440)

2,000

46,560

Sales Discounts ($48,000 x .03)

1,440

Accounts Receivable—Bates

48,000
LO 1


LEARNING
OBJECTIVE

2

Describe how companies value accounts receivable and record their
disposition.

Valuing Accounts Receivables




Alternative Terminology

Current asset.

You will sometimes see
Bad Debt Expense called

Valuation (cash realizable value).

Uncollectible Accounts
Expense.

Uncollectible Accounts Receivable

9-9



Sales on account raise the possibility of accounts not being collected.



Companies record credit losses as debits to Bad Debt Expense.

LO 2


Valuing Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off
Theoretically undesirable:

9-10

Allowance Method
Losses are estimated:



No matching.



Better matching.



Receivable not stated at cash realizable value.



Receivable stated at cash realizable value.



Not acceptable for financial reporting.



Required by GAAP.

LO 2


Valuing Accounts Receivable

How are these accounts presented on the Balance Sheet?

Allowance for

Doubtful Accounts

Accounts Receivable

9-11

Beg.

500

25

Beg.

End.

500

25

End.

LO 2


Valuing Accounts Receivable

9-12

LO 2


Valuing Accounts Receivable
Alternate Presentation

9-13

LO 2

Valuing Accounts Receivable
Journal entry for credit sale of $100?
Accounts Receivable
Sales

100

100

Allowance for

Doubtful Accounts

Accounts Receivable

9-14

Beg.

500

25

Beg.

End.

500

25

End.

LO 2


Valuing Accounts Receivable
Journal entry for credit sale of $100?
Accounts Receivable
Sales

100

100

Allowance for

Doubtful Accounts

Accounts Receivable

9-15

Beg.

500

Sale

100

End.

600

25

Beg.

25

End.

LO 2


Valuing Accounts Receivable
Collected $333 on account?
Cash 333
Accounts Receivable

333

Allowance for

Doubtful Accounts

Accounts Receivable

9-16

Beg.

500

Sale

100

End.

600

25

Beg.

25

End.

LO 2


Valuing Accounts Receivable
Collected $333 on account?
Cash 333
Accounts Receivable

333

Allowance for

Doubtful Accounts

Accounts Receivable

9-17

Beg.

500

Sale

100

End.

267

333

25

Beg.

25

End.

Coll.

LO 2


Valuing Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts

15

Allowance for

Doubtful Accounts

Accounts Receivable

9-18

Beg.

500

Sale

100

End.

267

333

25

Beg.

25

End.

Coll.

LO 2


Valuing Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts

15

Allowance for

Doubtful Accounts

Accounts Receivable

9-19

Beg.

500

Sale

100

End.

267

333

Coll.

25

Beg.

15

Est.

40

End.

LO 2


Valuing Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful Accounts
Accounts Receivable

10
10

Allowance for

Doubtful Accounts

Accounts Receivable

9-20

Beg.

500

Sale

100

End.

267

333

Coll.

25

Beg.

15

Est.

40

End.

LO 2


Valuing Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful Accounts
Accounts Receivable

10
10

Allowance for

Doubtful Accounts

Accounts Receivable
Beg.

500

Sale

100

End.

9-21

257

333

Coll.

10

W/O

W/O

25

Beg.

15

Est.

30

End.

10

LO 2


Valuing Accounts Receivable

9-22

LO 2


Valuing Accounts Receivable

DIRECT WRITE-OFF METHOD FOR UNCOLLECTIBLE ACCOUNTS

Illustration: Assume that Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December
12. Warden’s entry is:

Bad Debt Expense

200

Accounts Receivable—M. E. Doran
200
Theoretically undesirable:

9-23



No matching.



Receivable not stated at cash realizable value.



Not acceptable for financial reporting.
LO 2


Accounts Receivable

ALLOWANCE METHOD FOR UNCOLLECTIBLE ACCOUNTS

1.

Companies estimate uncollectible accounts receivable.

2.

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts (a contra-asset account).

3.

Companies debit Allowance for Doubtful Accounts and credit Accounts Receivable at the time
the specific account is written off as uncollectible.

9-24

LO 2


ALLOWANCE METHOD

RECORDING ESTIMATED UNCOLLECTIBLES
Illustration: Hampson Furniture has credit sales of $1,200,000 in 2017, of which $200,000 remains
uncollected at December 31. The credit manager estimates that $12,000 of these sales will prove
uncollectible.

Dec. 31

Bad Debt Expense
Allowance for Doubtful Accounts

9-25

12,000
12,000

LO 2